Home Products stock and bond valuation
HOME PRODUCTS - Case 9
STOCK AND BOND VALUATION
In all textbooks, the valuation of stocks and bonds is simply stated as the present value of all the future cash flows expected from the security. The concept is logical, straightforward, and deceptively simple. The valuation of bonds is usually presented first, since the relatively certain cash flows are broken into an annuity and a payment of the par value at some specific date in the future. Preferred stock valuation follows bond valuation and the value of preferred stock is shown to be the present value of perpetual annuity. The cash flows from the constant-size dividend is fairly certain, and most preferred stock does not have a maturity date. Finally, common stock is presented but neither the future cash flows (from dividends) nor the final value is known with any degree of certainty, Generally students seem to understand the bond and preferred stock valuation techniques, but they tend to be very skeptical of the common stock valuation model. Using the discounted cash flow models on an actual company can help dispel some of the doubts, but more importantly it can indicate how the models explain price behavior.
HOME PRODUCTS, INC.
Home Products, Inc, (HPI) is a leading manufacturer of prescription and ethical drugs; specialty foods and candies; and proprietary drugs. Important product names include Advil, Anacin, Dimetapp, Norplant, and Robitussin. Total revenues in the last fiscal year were in excess of $9 billion.
The company has a capital structure that is made up of 34 percent long-term debt, 3 percent preferred stock, and 63 percent common stock. One of the two largest domestic long-term debt issues is an 8.5 percent coupon bond (semi-annual) that is due in 15 years. This debenture is currently selling for $1020. The bond is callable in seven years and if called will be redeemed at a price of 1040. The other large...
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